New Zealand Housing Prices Likely to Slump, Says Reserve Bank

Based on trends in property values, homeownership rates, migration and the economy in New Zealand, housing prices are expected to drop in 2009. The Reserve Bank of New Zealand predicts a drop by about 24 percent, but a protracted recession could bring a more severe plunge. For more information, read the following article from Global Property Guide:

The downward adjustment of New Zealand’s overvalued housing market is expected to continue in 2009, with the deteriorating economy adding to the pressure.

During the year to end-Q3 2008, the median sales price of houses in New Zealand fell 6.1 percent, according to the Real Estate Institute of New Zealand (REINZ). When adjusted for inflation, house prices fell 10.6 percent over the same period.

The national median house price stood at NZ$337,500 (US$190,524) in November 2008, 4.1 percent down on a year earlier.

House prices started to fall in early 2008. House prices had risen by 4.5 percent in 2007, 11.9 percent in 2006 and 13.5 percent in 2005. Over the period of the housing boom (2001 to 2007) house prices rose by about 94 percent (66 percent in real terms).

In Q2 2008, the total value of housing stock dropped, for the first time since 1992, to NZ$592 (US$334.2) billion.

New Zealand’s economy is shrinking

New Zealand’s economy has been in recession since the first half of 2008, with GDP shrinking by 0.5 percent in 2008. The economy is expected to contract further by -0.4 percent in 2009, in sharp contrast to the robust 3.2 percent average annual GDP growth from 2001 to 2007.

Unemployment rose to 4 percent in 2008, up from 3.6 percent in 2007. In 2009, unemployment is projected to rise further to 5.4 percent, according to OECD forecasts.

With the economy in recession and credit conditions tight, the housing market is expected to continue its downward movement until 2010.

House prices are projected to fall 16 percent (24 percent in real terms) by end-2010 from their 2007 levels, according to the Reserve Bank of New Zealand (RBNZ). However the RBNZ warned that if global economic conditions deteriorate further, more severe house price falls can be expected.

Houses still overvalued

From 2003 to 2007, house prices have risen by an average of 13 percent per year. On the other hand, rents rose by just an average of 6.7 percent annually over the same period. This pushed rental yields down.

Average gross rental yields for high-end properties in central Auckland are now around 6.8 percent, according to the latest Global Property Guide research. A 50 sq. m. apartment sells for about NZ$6,609 (US$3,700) per sq. m., and has rental returns of around 6.6 percent. Price-to-rent ratios in Auckland are typically the highest in the country, so these yields are likely to be much higher than yields elsewhere in New Zealand.

To bring house prices to a level in line with fundamentals, "the average rental income will have to increase 71 percent or the median house price will have to fall 42 percent," according to a report issued by Strategic Risk Analysis Ltd. in August 2007. "Or, more likely some combination of the two will unfold," the report added.

Another measure of house price valuation is the house price-to-income ratio which has increased substantially, from 6.2x in 2000, to 11.1x in 2007. Debt servicing, as a percentage of disposable income, was 14.7 percent in Q3 2008, up from 8.6 percent in Q1 2000. Housing debt comprises over 90 percent of total household debt.

House prices in New Zealand were overvalued by 12 percent in Q3 2007, in the view of one IMF report. In addition, a recent study by Fitch Ratings ranked New Zealand as the 4th most overvalued house prices, next to France, UK and Denmark among 16 advanced countries.

New Zealand’s home affordability index deteriorated 9.6 percent in 2007, following a 7.3 percent decline in 2006 and 24.9 percent decline in 2005, according to Massey University. The decline in home affordability since 2002 was primarily influenced by faster growth of house prices and home loan repayments, as compared to the average wage.

From 1998 to 2003, around 18 percent of household incomes were spent on home loan repayments. With rapid house price increases, the ratio steadily rose, to more than 30 percent after 2006.

In 2008, home affordability improved for the first time in 6 years, mainly due to successive interest rates cuts and house price falls. Nevertheless, the index remained relatively high with around 32 percent of the average wage spent on home loan payments.

Transactions drop precipitously

Total residential property sales were just 4,279 units in November 2008, a sharp drop of 45.4 percent from a year earlier. The total value of houses sold was NZ$1.71 (US$0.97) billion in November 2008, 47.9 percent down from the previous year, according to REINZ.

In Auckland, New Zealand’s most populous region, property sales dropped 42 percent y-o-y to 1,411 units in November 2008. While Wellington is the country’s capital city, more businesses and people are located in Auckland and its property prices and sales volumes are the highest in New Zealand.

In the year to end-October 2008, total consents issued for new dwellings were 22 percent down on the same period last year.

In 2007, about 25,544 new dwelling units were authorized, down from 25,952 units in 2006. In Auckland, consents for new dwellings have dropped 15.3 percent y-o-y to just 6,110 units in 2007. The number of new dwellings authorized have declined since 2004 when a total of 31, 423 consents were issued.

Mortgage interest rates stubbornly high

Judging that house prices were overvalued and that inflationary pressures were rising, in 2004 the RBNZ began to raise the Official Cash Rate, moving it up to 8.25 percent by July 2007, from 5 percent in December 2003. The floating mortgage rate rose to above 10 percent, while the 2-year fixed mortgage rate was above 9 percent by 2nd half of 2007.

However starting July 2008 the RBNZ reversed gear. To counter the effects of the global financial crisis, it cut the key rate by steps to 5 percent in December 2008. Yet despite the cuts, the effective mortgage rate declined less. The floating mortgage rate only dropped to 9.6 percent in October 2008, from 10.4 percent in October 2007. The two-year fixed rate also fell to 8.2 percent from 9.1 percent a year earlier.

In November 2008, about 83 percent of total residential mortgages were fixed in the medium-term. About 39 percent of all mortgages can be reset after a year, while 44 percent are fixed for 2-5 years. Mortgages with fixed rates of 5 years plus were only 1 percent of the total outstanding mortgages.

Strong banking system

New Zealand’s mortgage market has expanded rapidly over the past decade, with outstanding housing loans increasing by 174 percent from 1998 to 2007. As percentage of GDP, housing loans rose from just 55.6 percent in 1998, to 94 percent of GDP in 2007. In November 2008, total residential mortgages outstanding at banks rose 7 percent to NZ153.4 (US$86.6) billion from a year earlier.

The banking system controls about 94 percent of the mortgage market, and remains relatively strong, despite worsening international conditions. Bankruptcies of non-bank lending institutions have been rising, but only 6 percent of total housing loans are controlled by these lenders.

Declining homeownership

Homeownership in New Zealand reached 73.8 percent at its peak in 1991. Since then, the rate has fallen sharply, and by 2006, only 66.9 percent of households either owned the dwelling they lived in or held that dwelling in a family trust. By 2006, about 25 percent of New Zealand’s population lived in rented dwellings.

The cause of the rental market’s growth? The faster increase of house prices as compared to rents, and the increase in the number of migrants. Most migrants initially rent accommodation, before buying houses.

From about 263,000 rented dwellings in 1991, the number increased 39.2 percent to 366,195 units in 2006. There were 1,471,749 occupied private dwellings in New Zealand, according to census figures from Statistics New Zealand.

Migration and the housing market

International migrant flows have a significant impact on house price movements and construction activity in New Zealand. The housing boom during the early-2000s was strongly associated with the increase in the number of immigrants during that time.

The net inflow of permanent and long-term migration was highest in 2002, with more than 38,000 migrants, followed by 35,000 in 2003 and 15,000 in 2004. However in 2007, the number of net migrants was just 5,500, significantly lower than the 14,609 in 2006.

The fall in migrants should reduce demand for housing—but perversely, it also affects housing supply. Massey University notes shortages of material and labor skills in the construction sector. To address the skills shortage, reforms to the 1987 Immigration Act has been proposed to parliament in April 2007. Major changes include:

A simplified visa system which provides clearer and more flexible management of non-citizen’s travel and stay in the country

A more efficient and responsive delegation process

Providing enhanced incentives for third parties like employers, carriers and education providers to abide with their responsibilities in the immigration system

New Zealand’s population is currently around 4.3 million. With growth rate of 1 percent per year, population is projected to reach 5 million in 2020.